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The Fiscal Theory Of The Price Level: A Critique

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  • Willem H. Buiter

    (European Bank for Reconstruction and Development, CEPR and NBER)

Abstract

This paper argues that the "fiscal theory of the price level" (FTPL) has feet of clay. The source of the problem is a fundamental "economic" misspecification. The FTPL confuses two key building blocks of a model of a market economy: budget constraints, which must be satisfied identically, and market clearing or equilibrium conditions. The FTPL asssumes that the government"s intertemporal budget constraint needs to be satisfied only "in equilibrium". This economic misspecification has far--reaching implications for the mathematical properties of the equilibria supported by models that impose the structure of the FTPL. It produces a rash of contradictions and anomalies. Copyright 2002 Royal Economic Society

Suggested Citation

  • Willem H. Buiter, 2002. "The Fiscal Theory Of The Price Level: A Critique," Economic Journal, Royal Economic Society, vol. 112(481), pages 459-480, July.
    • Handle: RePEc:ecj:econjl:v:112:y:2002:i:481:p:459-480
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    References listed on IDEAS

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    1. Buiter, Willem H., 1999. "The Fallacy of the Fiscal Theory of the Price Level," CEPR Discussion Papers 2205, C.E.P.R. Discussion Papers.
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